Thursday, March 30, 2006

The Squeeze is On

"With interest rates on the rise, and the housing market showing signs of a downturn, homeowners are starting to feel the squeeze."

"For many, the trouble started when the market was booming, and buyers flocked to interest-only loans in order to find their way into a bigger home. These interest-only loans were an attractive option while rates were low, but once the fixed term ends, monthly payments are likely to jump up to twice the previous amount."

"In the worst case scenario, homeowners could end up owing more money than their home is worth. The Early Show co-anchor Harry Smith had the story of one family that is caught in the squeeze."

"Meghan and Vince Jordan recently moved in to their brand new dream home in Denver, but they have one big problem — they can't get rid of their old one."

Oops.'"A year ago, we don't think we would have been in this situation. We think our house probably would have sold," said Meghan Jordan. The Jordans are highly leveraged, they have two kids, two mortgages and daycare costs. And their quandary is not unusual."

"Their home has been on the market since August, and so far they have dropped the price by $35,000. Now, the Jordans have taken a bridge loan to cover the costs of owning two homes. Even more nerve racking, they've taken out an interest-only loan, so for five years they are only paying interest. With rates on the rise, they are worried they took a bad risk."

"Rates on 30-year mortgages rose this week after the Federal Reserve pushed a key short-term rate up for the 15th time and indicated that more rate increases were possible."

"Mortgage giant Freddie Mac reported Thursday that rates on 30-year, fixed-rate mortgages averaged 6.35 percent this week, up from 6.32 percent last week. The increase pushed rates to the highest level since they hit a 2 1/2-year high of 6.37 percent the week of March 9."

The market was a little surprised at the (Fed's) comments which implied more tightening in the future," said Frank Nothaft, chief economist for Freddie Mac.

"That raised the expectation that inflation may be more of a threat than was previously thought, and that kind of thinking promotes upward pressure on mortgage rates like we saw across the board this week," Nothaft said.

"Some of the riskiest of loans -- the subprime ARM loans -- showed an increase in delinquencies at the end of 2005. The U.S. averaged a 12.6 percent delinquency rate in subprime ARM mortgages as of December 2005, which was up from 10.7 percent the year before."

"The last year was tough on mortgage holders. Nationwide, borrowers faced higher interest rates and fuel costs and mortgage delinquencies rose 4.7 overall, hitting its highest point since the middle of 2003."

"It's what we have been expecting," a Mortgage Bankers representative said. "There are so many new loans out there that haven't been seasoned. Interest rates may play a role in the future, but right now, it is just the economy -- job loss and low (home) appreciation."

What? I thought real estate only goes up?

"Rising mortgage rates are expected to cool off the extended boom in housing that saw sales of both new and existing homes set records for five consecutive years. Analysts are looking for sales to drop by around 6 percent this year."

"Greg McBride from Bankrate.com joined The Early Show Thursday to discuss ways for homeowners to protect their financial health. "

First, a look at the risk that comes with an interest-only loan. If, for example, a borrower took an interest only loan of $200,000 in 2003, their monthly payment would have been around $667. After the first adjustment, those monthly payments could jump to $1,415 in 2006.

"That's why (interest-only loans) are right for some but wrong for a lot of people. That payment increase is not something the average American household can handle."

"If you find yourself in this predicament, McBride says you should refinance out of harm's way."McBride stresses the importance of cutting into the loan balance and starting to build up what he calls an equity cushion, something the Jordan family doesn't have."

"They were 100 percent leveraged," he said. "They don't have any wiggle room. They need to start chipping away at the loan balance, building up an equity," which is so important because "if you have to sell suddenly, that's what's going to absorb your transaction cost."

"Another important piece of advice from McBride: don't borrow against home equity."

"Finally, he recommends living in your home for the long haul. That means accepting the idea of your home as a long-term investment, not a vehicle to get rich quick."

You should see all the mortgage brokers on their favorite industry message board claiming "consumers are smarter than ever with their finances, which is why ARM programs and pay option plans are available".

I almost fell out of my chair laughing. Then, when I said "I'm not so sure that's an accurate statement, considering the data available", they flipped out and started in with "so you're SAYING all ARM programs are a bad idea?" and "you're saying that NOBODY has ethics in our industry?"

You people who write these blogs really owe it to yourselves to register on the mentioned website. It's free. No spam mail, etc. It will give you an entirely new perspective on why this is happening.

Oh yeah, another favorite quote from a mortgage broker:

"Hey, I'm just doing what the borrower thinks is best or what I think makes sense"

If anyone thinks the mortgage industry still doesn't need government regulaion, well, that should pretty much change their minds.

Anybody see that new TV ad for Wachovia?..where the Broker stands in front of a perfectly nice rancher..and says, "your ordinary Loan officer can get you a house like this..but talk to a Wachovia Broker about different sorts of loans packages (read I/O.NMD or ARMs) and get.....(I know you're all thinking F"d) This much house!" With that she pulls out the For Sale sign and reveals a monster McMansion. "Get more house for your money" I always want to add, at least for 6 months or so till the rates go up.

i hope everyone ho reads this blog will check out today's press democrat article"study disputes idea of a housing price bubble" it deserves the judith miller award for excellence in journalism.by golly who would have thought of devising a rent to own calculator to analyze house prices....the may even be a nobel prize in economics on itsway to pomona college!!!

MV- I DID see that last night. Was just on the verge of falling asleep and totally thought I had to be dreaming already, because it was TOO funny!

I did see another commercial when fully awake though... for ReMax... it was the best... bahahaha... They said NOW MORE LISTINGS THAN EVER to choose from! bwahahahaha!!! I did laugh! :-D

Tom- if you find a link for the PD story would you mind posting it here? I searched for the story online but either it probably hasn't been posted yet. Will venture out and pick up a hard copy and see about it.

Matt- oy vey about the brokers... I have kept from posting as much as I have been reading about simply because.. well, because there is already a mortgage fraud blog, and I could post multiple stories a day just on that topic alone from reading those sites. I find it so hard to believe that the authorities don't swoop in and restructure that industry.

I was reading yesterday about the steps some want to take to regulate the industry and tighten standards for risky lending products... on the one hand some brokers claim that their clients are fully informed because that is their job... in the last infomercial article in the PD one of the brokers who said they just HAD to find a way to get these people into a house- also said when asked about her clients being informed ... she said "that's my job."

THEN in the discussions about regulation Executives in the brokerage industry have stated that it is NOT their job to give financial advice to the client... and that they are not supposed to give advice about what loan product is BEST for the client and their circumstances... but only there to offer up the variety of products and tell the features of each and let the CLIENT make a decision about which product best fits their circumstances.

WTF? Are you kidding me? Why don't we call old Mr. Fox to hang out and watch the hens in the henhouse?

So do clients KNOW that the broker isn't actually supposed to recommend anything? Isn't supposed to advise on what loan is appropriate for them? But simply to present all products?

Because I believe most people would say their broker recommended one product over another... and that I think is going to be the undoing of the way they have been allowed to operate.

Did I mention that I received my first resume from a Real Estate Agent yesterday? Yes... applying for a job at my company. Though I still can't think of a single job in my company that they would be qualified for... :-/

athena, i am a mortgage broker and i would love to see tighter regulations,and enforcement of ethical standards.roughly one thf the mortgage brokers i have met are both competent and ethical.a large percentage are delusional...which makes them more effective as salespeople at least 25% are both incompetent and delusional.by the way lenders reps have actively encouraged both the sale of inappropriate products and actual fraud.explicitly.i killed another bad deal today...it will pay off for me in the long term,and kevlar vests are so uncomfortable

It's not just the brokers. They are probably abou 2/3 of the problem. The other 1/3 of the problem is the lenders and their account reps that push these terrible programs.

In case you were wondering how it works:

Each lender that a mortgage company works with has an "account executive". This individual is responsible for convincing mortgage brokers to use the aformentioned lender to fund transactions.

The account executive is paid on commission. Therefore, it is just as much their interest as the broker to get loans closed.

I would LOVE to see this discussion where brokers were saying it wasn't their responsibility to give advice or direction or otherwise recommend a course of action to a borrower. That is total garbage. If a broker actually believes this, that broker needs to find a new line of work right now...

“The Mortgage Bankers Association said lenders who took on too much mortgage risk will face market punishment in the form of price disadvantages. ‘The private market can and does correct for excess risk more quickly than can a regulator who necessarily must move at a more deliberate pace,’ the mortgage lenders’ group said.”

“‘We believe that the types of mortgages that are the subject of the proposed guidance should be referred to as ‘alternative’ mortgages instead of ‘nontraditional’ mortgages,’ the community bank group said. ‘While it is the lender’s responsibility to provide borrowers with sufficient information for them to clearly understand the loan terms and associated risks, we do not believe it is appropriate or possible for the lender to identify or dictate the best mortgage product for individual consumers,’ the group said.”